The limited liability company (GmbH) is one of the most popular legal forms amongst entrepreneurs and start-ups as the liability of the founders is limited to the company’s assets. The formation of a GmbH offers significant advantages over other legal forms. The first part of our series has already presented an overview of the different legal forms.
However, it is also important to note that it is costly and rather time-consuming to found a GmbH. Our on-demand legal experts offer you comprehensive legal advice and support for the formation of your company in Germany.
This article provides an overview of the founding process of a GmbH and the liability of the shareholders.
1. Formation of a GmbH
Who can set up a GmbH?
Formation by one or more shareholders
The GmbH can be founded by a single person as well as jointly by several founders.
Purpose of the company
For the vast majority of business purposes, the establishment of a GmbH can be considered. The object of the company can be a trade that requires a license. In addition, the legal form of a GmbH is also open to freelancers. However, it should be noted that trade taxes are incurred and the accounting requirements increase in such a case.
Share capital
To establish a GmbH, a share capital of at least EUR 25,000 is required. The capital can be raised by a capital contribution in cash or by contributions in kind to the value of EUR 25,000. The contribution must be made immediately in the amount of EUR 12,500, the other half can be made at a later date after a corresponding resolution of the shareholders’ meeting.
2. Formation Process
The formation of the GmbH takes some time and depends, among other things, on the complexity of the articles of association and whether one or more contributions in kind are made.
Articles of Association
The GmbH is founded by articles of association. The legislator provides model protocols for the company with a sole shareholder as well as for companies with up to three shareholders by which the company may be formed under a simplified procedure. There are certain minimum requirements that the articles of association must contain. Additionally to the statutory minimum requirements, further individual regulations can be made in the articles of association specifically tailored to the respective company and shareholders.
Furthermore, a list of shareholders must be provided showing the shares of the capital contribution to be made by each shareholder.
A notary public must notarize the articles of association, regardless of whether they are individually drafted or whether the model protocol was used. The next step of the formation process is to open a business bank account with the GmbH as the account holder and the shareholders have to transfer the respective share capital to that bank account.
Subsequently, the notary applies to enter the company into the commercial register. The GmbH takes effect (legally) with the entry to the commercial register.
3. Liability
As the name already indicates, the liability of a GmbH is limited to the company’s assets. However, it depends on the position and the time of the claim.
Liability of the GmbH in formation
In the case of a GmbH in formation, i.e. until the company has been entered in the commercial register, the acting partners are liable with all their private and business assets. For this reason, no far-reaching and risky decisions should be made in the phase up to the registration of the company in the commercial register. The period between the signing of the articles of association, the opening of the business account, and the entry into the commercial register should be kept as short as possible to avoid unnecessary liability risks.
Liability of the shareholders in the GmbH
After the successful establishment of the company, the liability of the shareholders is limited to their capital contributions. Thereafter, the liabilities of the company are settled only from the company’s assets. Liability of the shareholders with their private assets is generally excluded. However, the partners are liable for ensuring that the share capital is fully available at all times.
Other than that, banks usually require additional securities from the private assets of the shareholders for loans for start-ups and companies with little share capital.
4. Representation and Management
As a legal entity, the GmbH is not capable of acting itself but is represented by its governing bodies (director and the shareholders’ meetings). The appointment of a director is mandatory by law. The director acts for the GmbH and has the power to conclude contracts on behalf of the company. It is also possible to appoint several directors that act in joint representation, insofar as no deviating regulations are made in the articles of association.
Pros and Cons:
| Pros: | Cons: |
| – Liability limited to the company’s assets – A single shareholder can found the GmbH (“one-man GmbH”) – Security of business partners through (high) share capital – The legal form offers the possibility for start-ups to have investors participate in the company without liability risk | – High minimum capital of EUR 25,000 is required. At least half of this must be paid in at the time of incorporation – Formal requirements for the formation (and changes at a later date) – Costs of formation (approx. 1000 – 3000 EUR) – Accounting and bookkeeping obligation – Obligation to publish the annual financial statements – The tax liability of the GmbH requires advice from a tax consultant |
Are you an entrepreneur considering to found a limited liability company (GmbH) in Germany?
Our on-demand legal experts offer you comprehensive legal advice and support for the formation of your company in Germany.
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